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The impact of COVID-19 induced panic on stock market returns: A two-year experience

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  • Cervantes, Paula
  • Díaz, Antonio
  • Esparcia, Carlos
  • Huélamo, Diego
Abstract
This paper explores the relationship between the stock markets of emerging and developed economies and the fear triggered by the COVID-19 pandemic crisis in a period that spans from mid-January 2020 to mid-February 2022. The potential relations are analyzed in terms of Granger causality and dynamic correlation, both from the view of raw undecomposed returns and different time–frequency decompositions derived from a previous wavelet transform screening approach. Overall, our Granger and dynamic correlation results suggest that changes in panic indexes resulting from the COVID-19 pandemic do not have a significant relation with the raw stock market returns, but the reverse occurs in terms of time–frequency decompositions. Correlation analysis also indicates that all countries have a quite similar pattern of phase transitions, with certain stages preceded by a hump and others by a valley, i.e., they exhibit both positive and negative correlations. Despite a gradual reduction in media coverage, both causal relationships and correlations between financial markets and panic indexes held in 2021 and early 2022.

Suggested Citation

  • Cervantes, Paula & Díaz, Antonio & Esparcia, Carlos & Huélamo, Diego, 2022. "The impact of COVID-19 induced panic on stock market returns: A two-year experience," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 1075-1097.
    • Handle: RePEc:eee:ecanpo:v:76:y:2022:i:c:p:1075-1097
    DOI: 10.1016/j.eap.2022.10.012
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    More about this item

    Keywords

    Stock market; COVID-19; Panic index; Granger causality; ADCC-GARCH;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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